The Agonist - Economics

Housing Market: No Bailouts Please!

Fri, 16 Mar 2007 14:09:00 -0700

As the carnage in the housing markets spreads from sub-prime, to Alt-A, and into prime (and it is, because there are a lot of Prime ARMs, plus when real estate prices crash 30% to 50%, which they are going to, a lot of "prime" borrowers are going to be underwater, holding mortgages that cost more than their houses) there's going to be a lot of screaming and moaning and whining about bailing everyone out. In fact, it's already begun, with Senator Dodd (whom I like) saying inane things like:

Congress "may need to do something much more quickly to provide some protection or you could end up with a lot of poverty and blight," Dodd said. Federal aid of a few billion dollars "may be a lot less costly" than $164 billion in lost wealth, he said...

...Dodd reaffirmed a plan to introduce a bill that would combat predatory lending. "There is a difference between a subprime lender and a predator, and I don't want to lose the subprime lender" he said.

"Finally the federal regulators are beginning to indicate that they want to start requiring similar standards to be used for prime and subprime lending," Dodd said, referring to the new guidelines.

"I am a strong advocate of subprime lending," Dodd said. "I don't want that word to become a pejorative as junk bonds did."

Ok, first of all, subprime lending is predatory lending and subprime mortgages are junk. Period. ARM's are traps. Variable rate mortgages were crap when they were offered. No documentation loans (ie. just tell me what your income is) are crap. Subprime loans are designed to give loans to people who can't pay them back or who can't prove they can pay them back. Period - if they could pay them back, or prove they can pay them back, they wouldn't be subprime borrowers.

As for Dodd's 164 billion of lost wealth, the US would be far better off losing it. Real estate wealth is weighing down the country's competitiveness. Every dollar more a house is "worth" means that it costs more in property taxes; means that you need to earn more to pay your mortgage; and for those who don't have a house already means they never will have one, unlesss perhaps, like Japanese families, they're willing to take on multi-generational mortgages.

More After the Jump

"Ownership" shouldn't be the goal - not at any cost. If Congress wants people to own houses, then it should directly subsidize home ownership. There are plenty of ways to do that, most of which don't involve people being stuck with mortgages with predatory interest rates.

The goal should, rather, be affordable housing - whether owned or rented. One of the main reasons the US is no longer competitive in most markets where there is foreign competition is the huge cost of living in the US. And a large part of that is the rapid spiral of real estate costs. A country having expensive real-estate is not necessarily a good thing; not when it has to compete with countries with cheap real estate. Maybe Tokyo or New York real estate is not overvalued compared to the income it can bring in - but McMansions are, because the amount of money you can earn as a normal person in the US has not gone up nearly as fast as the price of housing.

That's pure inflation, and the fact that it isn't counted as inflation because the BLS uses "rent equivalent" instead, is just another reason why headline inflation numbers in the US mean nothing. If the cost of having a place to live goes up, that effects people - and it effects even people without mortgages, since as you get spiralling price increases in houses, you also get spiralling property taxes; and as you push suburbs out ridiculous distances beyond the areas that actually have jobs; you have to travel more and more and gasoline and car repairs are an expense as well.

The mortgage industry over the last 6 years, encouraged by the Fed, the Federal government, and, frankly, Congress, sold mortgages to people who couldn't afford them. I've worked in an underwriting department and I have no sympathy - responsibility for lending is a two way street. If an applicant comes to you who can't afford your loan, you should turn him down. If you don't, don't go crying to the Federal government for a bailout; and don't expect the court system to act as your leg breakers when you try to collect on your pound of flesh.

If Dodd wants to do something for people caught in these, frankly, predatory loans, then perhaps he could lead the charge to repeal the recent bankruptcy act, which made it impossible for most of these people to go cleanly bankrupt. A lot of homeowners are going to be unable to walk away from their homes; to simply hand the keys over to the banks. And frankly, they should be able to - it is the job of banks to understand what a bubble is; it is the job of banks to understand what credit risk is; it is the job of banks to not overlend. They have, or should have, much more knowledge than ordinary borrowers can reasonably be expected to have.

No bailouts - letting the price of housing collapse will be good for the US economy once it's over (yes, it won't be pleasant getting there, but too bad - you had the bender, now it's time for the hangover.) Letting banks and mortgage broker and the wall-street brokerages who packaged the loans into various security instruments pay the price for their own blind greed is also good - if these people know that every time they get stupid and greedy and ignore risk they'll be bailed out, like they were bailed out after the stock market bubble, they'll keep doing it. It's known as moral risk, and there's far more of it in the investment industry and the banking industry than there is in the borrowers whom they want to turn into life long debt slaves because they sold them debt they could never be expected to pay back.

Sometimes you need to clear the decks. This is one of those times. People won't like me saying this, I'm sure, but it needs to be done. Housing prices need to decline significantly. The people who got rich peddling loans to people who coulnd't afford them need to go bankrupt themselves, so the real pain isn't concentrated amongst borrowers.

And borrowers need to be allowed the same right the big boys get - the right to go bankrupt cleanly, hand the keys over to the people who sold them a loan they couldn't afford; walk away, and in seven years, when the bankruptcy goes off their credit record, start again.

One cure for hangover is hair-of-the-dog. Grab a bottle and take a big drag of liquor. That's what the US did after the stock market crash.

Don't do it again.

Katrina Litigation Reality Check

Fri, 16 Mar 2007 13:10:01 -0700

Cross-posted from Tort Deform

I recently read Walter Olson’s (Senior Fellow at the Manhattan Institute) op-ed in Times of London. There’s a lot in there that I’d like to spend time discussing, but I’ll just focus on this one misleading representation.

In his overview of the state of civil litigation in America, Olson describes the Katrina homeowners insurance lawsuits in the following manner:

In nearby Mississippi, meanwhile, insurers besieged by the state’s politico-legal tag teams are offering billions to settle Katrina flood damage claims, notwithstanding clear flood exclusions in their policies. (link)

Tort “reformers,” repeatedly, misleadingly, and unfairly keep using and spreading this talking point. However, in Mississippi, the argument that the water damage was not actually a flood as defined in the insurance contracts, but a "surge" that is not specifically excluded was rejected (perhaps unfairly) by the presiding federal judge many months ago. The idea is to make the Katrina lawsuits sound silly, frivolous, and unfair to “hard-hit” insurance companies. Why would you file a claim with your insurance company for flood damage when you don’t have flood insurance? The narrative goes that people are trying to game the system and get rich quick through ”jackpot justice.”

This characterization of these homeowners insurance lawsuits is incredibly disingenuous.

1) The currently standing claims in Mississippi are not about flood damage, but wind damage that was in some cases also complimented by flood damage.

2) There is now a well documented pattern and practice of bad faith denials of valid wind related homeowners insurance claims.

3) Tort “reformers” like Walter Olson are in reality attempting to defend an arcane construction of these homeowners' insurance policies that argues that even if the home is damaged by wind, if the already damaged/destroyed home is later further damaged by flooding, even hours or perhaps days later, the insurance company no longer has to pay…anything. Judge Senter, the judge responsible for adjudicating these claims in Mississippi, had this to say about the validity of this manner of interpretation of these contracts:

When the policy is read as a whole, I find that this exclusionary provision is ambiguous-the policy as a whole providing explicitly for windstorm coverage in one section and purportedly excluding the same coverage on the grounds that a windstorm, a "weather condition," and an excluded peril, a flood, occurred at approximately the same time - If this second provision were read to exclude wind damage that occurs at or near the time that any excluded water damage occurs, the result would be contrary to well-established Mississippi law.

The position currently defended by tort “reformers” has been found to be contrary to well-established Mississippi law, and was clearly written this way by insurance companies with the knowledge that it would be (and the hope that it might come before a conservative judge who would still uphold it – notwithstanding ”well-established Mississippi law”). Regardless, Nationwide Insurance (and many other home insurers) attempted to game homeowners through deceptively and ambiguously writing their insurance contracts to basically immunize themselves from having to pay valid wind damages.

That sounds a lot different than the oversimplified:

In nearby Mississippi, meanwhile, insurers besieged by the state’s politico-legal tag teams are offering billions to settle Katrina flood damage claims, notwithstanding clear flood exclusions in their policies.

To underscore this post and this point, here’s the final installment of the CNN series on the abuses of the homeowners insurance companies.

CNN’s The Town That Fought Back Vol. 6

Time to sell?

Fri, 16 Mar 2007 08:51:41 -0700

I am very new to this site and unsophisticated in economics. However, I've been following the subprime situation and am wondering if anyone could help me. My husband has received a job offer in a mid-sized city where housing is less expensive and is more appealing in terms of general "quality of life" issues.
We moved to the DC area in the summer of 2005 and purchased a townhouse at the peak of the bubble here. Since that time, the market has slowed and we realize that we will likely have to accept an offer at, or less than what we paid. I believe that the housing market will continue to decline given this subprime situation. My question is: would it be best to sell now and move to a more favorable market or ride it out for a few years?

Be Careful Up There . . .

Wed, 14 Mar 2007 10:40:27 -0700

. . . and don't look down.

Another Good Reason Why . . .

Sat, 10 Mar 2007 22:40:49 -0800

. . . America is in decline: because it's easier use cash flow as collateral to borrow Yen at .25% and then buy US treasuries at 4% and pocket the 3.75% as pure profit and then leverage out the money in treasuries 10 times and do it all again. (Yes, I am aware I am over-simplifying how a hedge fund works, still, my my point stands.)

So, what happens if you have a bad week in the market?

No worries, just sell some assets, except this time they are stores that employ hundreds of people.

First Sub-Prime Lender On Its Way Out

Fri, 09 Mar 2007 16:11:49 -0800

This ain't good news. New Century has halted making news loans, isn't taking new applications and got this write-up from JPMorgan Chase:

``A bankruptcy filing or liquidation may well be announced in the next week or two,'' JPMorgan Chase & Co. analyst Andrew Wessel wrote in a report to clients yesterday.

It'll get worse before it gets better. And you know that old saw about a conservative is a liberal that got mugged? Well, here's one for this decade and the next: a liberal is a conservative that got foreclosed.

Believe it, cause it's going to happen.

Job Growth . . .

Fri, 09 Mar 2007 10:36:21 -0800

. . . in case you were wondering, slowed this month and came in under the expected 100,000 new jobs.

Ian- just a quick reminder that about 150K is the break even point to keep up with population growth

Markets, Retails Sales, Employment Numbers and Asian Markets

Thu, 08 Mar 2007 18:46:48 -0800

Tomorrow the big employment numbers come out and on the heels of today's poor retail sales it might be enough to knock some more sense back into the markets.

Then again, the nineties were a decade dedicated to inflating markets, so you can never tell.

Regardless I'm sticking with what I've been saying the last week: this is a throwback rally that won't last but a few more days and then we'll get back to testing the lows of last week.

You Can Call It . . .

Wed, 07 Mar 2007 12:48:05 -0800

. . . the American Dream but what we have today is more like a beta release with a boatload of bugs?

"Nothing is priceless," indeed.

More on the new American Dream here.

Just as an FYI . . .

Mon, 05 Mar 2007 19:44:51 -0800

. . . I had Bonddad himself on the show last week and in light of this post and this post it's worthwhile to listen to what we discussed once again. Markets, carry trade, the Yen and whatnot, all explained in less than 16 minutes, plus we crack a few jokes.

Looks to Me Like . . .

Mon, 05 Mar 2007 17:09:34 -0800

. . . the Yen carry trade is unwinding and the usual suspects think it's just a dip. I could be wrong, but I'm glad I'm not responsible for millions of dollars anymore.

First off, Saut says the same thing Hale and I spoke of last Wednesday, mainly that this started when Japan hiked its overnight rates week before last:

“We think Tuesday’s Tumble was set up a few weeks ago when Japan raised interest rates, thus signaling it was ending its zero interest rate policy of over a decade. While we got into a few heated discussions with various panglossian pundits on CNBC that Japan’s rate-ratchet would be gradual, we argued that while we agreed it will indeed be gradual that was NOT the point. The point was the direction of Japanese interest rates and that direction is now UP. Given the massive amounts of hedge fund money feeding at the Japanese carry-trade trough, we warned that the environment calls for even increased caution. Recall that for years the hedge funds have been borrowing a million bucks in Japan at virtually zero percent interest rates, levering that money ten, twenty, or even thirty to one and taking that ten, twenty, or thirty million dollars and buying something that either yielded more than the cost of the borrowed funds, or was going “up” in price, be it New Zealand bonds, gold, Brazil stocks, or in this case Chinese stocks. As long as the purchased vehicle was going ‘up’ in price, and the Japanese yen held steady or better yet declined, it was nirvana and highly profitable. Yet when Japan raised interest rates, the Japanese yen went into a bottoming pattern, in our opinion. We spoke repeatedly about the yen’s bottoming sequence . . .

Now, I know some of you don't like Saut at Raymond James, but he's been right for a long time now:

Well, all day Friday we told accounts, “Never on a Friday” meaning that markets typically don’t bottom on a Friday once they get into one of these sorts of downside skeins. Indeed, participants tend to not want to hold “long positions” over the weekend, fearing that investors will brood about their weekly losses and therefore show-up the beginning of the following week in sell-mode. And that, dear readers, is what gives us the trading sequence whereby stocks bottom in the Monday/Tuesday timeframe leading to the perfunctory three- to five-session throwback rally. From there another pullback should be in order and that is when it will become more apparent if this is something more than just a 5% - 8% correction.

Never mind me, read the whole thing.

Minack At Morgan/Australia Calls . . .

Fri, 02 Mar 2007 18:26:57 -0800

. . . for a housing led slump in 2008. Interesting interview for the econogeeks, like me, out there.

Meanwhile Bill Gross at PIMCO talks about a flight to quality, a rather common refrain indeed, but what happens if the quality looses its, er, quality?

Speaking of High Finance . . .

Fri, 02 Mar 2007 11:29:33 -0800

. . . Bill Gross' monthly Investment Outlook is up on the PIMCO site. He's not got quite the performance of Warren Buffett, of course he just does bonds, but he's the kind of fellow who surrounds himself with smart people, who listens closely and is not afraid to call a contrary bet. He's also smart enough to keep his mouth shut when he clients money is on the line, see PIMCO's unwinding of Argentine debt before the collapse for a great example. Regardless, he's always worth a read.

If You're Like Me . . .

Fri, 02 Mar 2007 10:23:04 -0800

. . . and you read Warren Buffett's letters every year, you'll be wanting to read the latest. Always enlightening. There is something to be said for Buffett's stodgy, old-line version of investing, one I largely follow myself. The again, he's beaten the S&P 500+dividends by an average of 11% every year since 1965. I doubt you'll find a mutual fund on the planet with results like that.

Economics Are Funny

Thu, 01 Mar 2007 21:06:37 -0800

This is hysterical: